The government was accused yesterday of being "in denial" about the impact of soaring energy costs on British industry. The EEF, the organisation representing thousands of British manufacturing companies, accused ministers of complacency and said industry was being left to pick up the bill.

The EEF responded furiously to ministerial claims that Britain was awash with gas, that prices were among the lowest in Europe and that only a few big energy users which had bought power on the spot market faced problems.

The organisation's director general, Martin Temple, said: "Far from having the cheapest energy prices in the EU, UK companies are facing the highest gas prices. These remarks smack of complacency and we are now at the stage where we can only conclude that government is in denial over this issue and it is industry which is now paying the price."

Industry sources suggested wholesale electricity prices for big industrial users in the UK were 50% higher than in France and Germany, while wholesale gas prices were three to four times higher than in the Netherlands. Prices in the spot gas market - for immediate delivery - have doubled in the past week.

Several companies in the chemicals industry, a big consumer of energy, are reported to have cut production. Alan Eastwood, head of competitiveness and utilities at the Chemical Industries Association, warned that the differential between energy prices in Britain and continental Europe would affect competitiveness. The combination of volatility and high prices left firms "between a rock and a hard place. We are worried that we are having to draw from storage so early in the winter. It could be very serious."

No intervention

The government yesterday ruled out intervention in the energy market with the industry secretary, Alan Johnson, predicting that while a small number of companies were facing difficulties the lights would not be going out. "This is a winter when myself and the energy minister will be getting up every morning and if there is a frost we will worry. In future years we will not be so worried," he said. But he added: "Those that predicted the lights would go out this winter unnecessarily worried some very vulnerable and elderly people and that is not going to happen under any scenario whatsoever."

Under attack from the Conservatives at prime minister's questions for failing to prepare for the energy shortage, Tony Blair admitted that the country faced difficulties with gas prices owing to an impending cold winter. Later the energy minister, Malcolm Wicks, answering an urgent question in the Commons, said the national grid was "awash with gas", and accused the Tories of talking up a crisis.

The Tory shadow energy minister, Bernard Jenkin, said: "Industry will be astonished to hear you saying that we are awash with gas when they are facing the prospect of interruptions." Mr Johnson, speaking at a select committee, said despite a £10bn investment programme, the "market had not reacted sufficiently to a decline in North Sea gas that very few people had predicted".

The UK Offshore Operators Association denied its members were not delivering on wider targets. "We believe we are producing much in line with what we projected a few years ago and do not agree fields are depleting quicker than expected," a spokeswoman said.

Supply crunch

The consumer watchdog energywatch, which has often been a ferocious critic of the gas industry, was also convinced that a range of problems produced the supply crunch but ruled out profiteering by British firms. "There are various problems on the continent, including gas prices being linked with the oil price - for which there is no good reason - long-term contracts by the likes of Gazprom and German firms, plus the failure of nation states in the European Union to respond to demands for open and fair competition," an energywatch spokesman said.

One concern is that though capacity through the interconnector between Belgium and Britain has doubled recently it is running well below its peak. One theory is that the additional capacity came before companies had supply contracts in place. There are also suggestions that long-term contracts are restricting exports to the UK.

Market sentiment is also a factor in keeping prices high, with traders hanging on to gas in the hope prices will rise further over the winter.

Big energy users including the steel maker Corus and the glass manufacturer Pilkington are switching to oil where possible. Corus, whose contract allows supplies to be interrupted for 45 days a year, said it had agreed to reduce production at times of peak energy demand and make up the difference at other periods. "We are monitoring the situation hour by hour, day by day but we have no plans to reduce production," the company said. A Pilkington spokesman said: "To an extent, something like this happens every year. We have put in measures to deal with it." There were no plans to cut production,.

Some firms wanting to switch fuels have to apply to the Environment Agency for permission. Yesterday a spokesman for the agency said it had received between 25 and 30 applications.

High prices have hit small businesses spending around £50,000 a year on gas particularly hard. This week the market for those trying to buy a year's supply had all but disappeared, many traders were refusing to quote; others reported offers being kept open for an hour at most.

FAQWho suffers?

Why are wholesale prices so high?

The cold weather spell has panicked the market at a time when traders have been worrying about physical shortages of supply.

Will it mean higher bills for consumers?

Retail prices were going up before the latest scare. But, this latest spike will feed through to domestic bills unless warm weather arrives and stays.

Will it lead to power cuts?

Some businesses are reducing output to save money but others have agreed "interruptible" contracts allowing energy firms to cut supplies. If things deteriorate, manufacturing could be hit but energy firms say householders will not be affected unless we have a Siberian winter.

Why are there supply fears now?

Because Britain's North Sea supplies are running down fast and we are having to import more and more. Supplies through pipelines from the continent are not as easy to access as people presumed and little storage capacity has been built.